Canadian cities cash-strapped but keep books balanced

Detroit could learn a thing or two from the municipal bookkeepers across the river in Windsor.

The Motor City is awash in debt, so much so that it has the ignoble distinction of being the largest city in United States history to seek out bankruptcy protection from its creditors.

Years of economic decline, a dwindling population and tax revenues has led Detroit to accumulate $18 billion in debt, borrowing in the end simply to maintain its operating budget –literally raising money through bond sales to keep the lights on, and even there, 40 per cent of the city’s street lamps don’t function.

The U.S. city has a $3.5-billion shortfall on public pensions and another $5.7 billion owed to workers’ benefits.

“Detroit simply cannot raise enough revenue to meet its current obligations and that is a situation that is only projected to get worse absent a bankruptcy filing.” Gov. Richard Snyder said in a letter accompanying the city’s Chapter 9 filing.

Experts say the likelihood of a financial emergency like the one Detroit finds itself in occurring to a Canadian city is extremely low.

“We have cash-strapped cities, but nowhere near bankrupt cities,” Mario Lefebvre, director of municipal studies for the Conference Board of Canada said in an interview.

One big reason for that is because nationwide, municipalities cannot run operating deficits, meaning by law they cannot borrow or use credit to fund day-to-day services and operations.

Cities can and do borrow to fund big-ticket items like infrastructure development or other special projects, but there’s also limitations on how much debt they can take on and how much of their tax revenues can be paid to service that debt.

Ontario municipalities, for example, cannot dedicate more than 25 per cent of total revenues to paying off loans.

As a result of the restrictions, which are written into provincial law, the combined debt burden across all Ontario municipalities is $15 billion, or $3 billion less than Detroit, a city relying on 700,000 to service its debts.

“Some provinces have limits on debt, some have limits on the debt charges they have to pay out. Some have both,” said Enid Slack, a professor at the University of Toronto’s Munk School of Global Affairs and director at the Institute on Municipal Finance and Governance.

“Municipalities in Canada generally are in good fiscal shape, there’s almost 4,000 so it’s difficult to speak about them altogether, but generally because they’re not permitted to run operating deficits and there are restrictions on the amount of borrowing they can do, they are in good fiscal shape,” Slack said.

Experts tend to suggest Canadian cities suffer from the opposite of excessive borrowing – their fiscal framework makes cities stingy.

“The problems our municipalities face are infrastructure deficits, they may balance their books and look good fiscally but they have problems trying to invest in infrastructure that they need,” Slack said.

“It’s kind of self-imposed discipline which at times is even too strict,” the Conference Board’s Lefebvre said.

U.S. cities and municipalities also have additional revenue streams that Canadian cities don’t or are prohibited from collecting. U.S. municipalities collect a share of sales taxes and in some states, income taxes – two sources of money cities north of the border don’t collect, leaving them reliant on property tax, fines or “user fees” and government transfers.

Property tax accounts for about two-thirds of municipal government revenues, Lefebvre said.

“Because they have limited tools, there often isn’t enough money left over to invest in infrastructure,” Slack said.